From the moment my Dad lent me his copy of Rich Dad, Poor Dad, I always dreamed about investing in real estate. Not just investing in my primary residence, but utilizing real estate investing to generate passive income that moves you from the left to the right side of Rich Dad’s CASHFLOW quadrant.
But as I focused on my career and my startups, it was something I put on the backburner.
Becoming Accidentally Retired allowed me to take the time to educate myself, diversify our investments, and shift cash we were holding on the sidelines into something that could generate passive income stream.
There are so many reasons why investing in real estate makes sense:
- Diversify our investments (currently predominantly stocks/bonds/alternatives)
- Generate passive income with buy and hold investment strategy that yields positive cash flow
- Grow our skills as investors and learn something new
- Passion for real estate investments
So after some discussion and reviewing potential financials for everything from commercial properties, to single family homes, multi-family homes, etc. we settled on a vacation rental.
We felt that a vacation rental would allow us to enjoy the property as a second home, give us a new challenge, and if we ran it as a business v. a hobby, we could achieve high occupancy and higher cash on cash return than other real estate investments, making it worth the additional time and hassle.
Owning a vacation home was also on my bucket list, so this all felt really natural.
I connected with a realtor in the area we were looking at who also ran her own vacation rentals. I also connected with another real estate investor I know, who has a lot of experience buying foreclosure properties.
We were able to get a lot of good information, and I built a pretty kick ass real estate investment calculator to analyze our prospective properties with.
The hunt was on.
But then after weeks investing in my real estate education (reading books, running properties through the calculator, etc.), I started to see that while potentially profitable, there were some serious issues with the vacation rental business that I had overlooked:
#1 Investing in a vacation rental is NOT passive
Just a few short weeks into my journey towards finding a property, this was already taking up a significant amount of time. I was working 3-4 hours a day between educating myself, looking at properties, and thinking through property management.
This is before owning the property in which we would need to renovate, furnish, find cleaning services for, etc. etc. The list just goes on for days.
#2 The returns WILL NOT outperform the total stock market
There is just no way around it. If you pay a property manager to run the property, it will cut into your profits significantly. And while, you may be able to find a good property manager with a lot of work, it is likely to cost you 2-3% per year in returns.
Now, we had plans to manage the property ourselves remotely, but at least in the area we were looking at, the returns simply did not outpace any other asset class.
This is why most of the real estate investment experts emphasize that you make money when you buy any property. The front-end deal is the most important. But even a great deal with forced appreciation may only yield between 10-12% yearly returns.
Meanwhile Vanguard Total Stock Market Index (VTSAX), has yielded an average of return of 11.30% in the last 15 years. And it costs us only 0.04% in fees to invest our money into VTSAX for a lot less hassle, headaches and risk.
#3 We are in a sellers market
At least at the current moment, we are in a sellers market. There is not enough inventory and the prices have been driven up due to increased demand in our market plus continued low interest rates.
#4 Short-term rentals are oversaturated
Short-term rentals in our area are oversaturated. I contacted a few owners and the one thing I hear is that they have to continue to lower nightly rates to retain occupancy levels they are looking for.
This trend will only continue as more people move to our state and as AirBnB and VRBO become more of a popular choice.
Short-term rentals are NOT the least bit passive
Right now, I am glad that we made the decision to pause our hunt of a vacation rental. Even though it has always been a goal of ours, it feels good to already have more time and less stress.
Our goal is to generate passive income, so that is going to require investments that are actually passive. Right now, VTSAX is looking like the perfect passive investment, and offers plenty of diversification.
I will be looking at Real Estate Syndication (Crowdfunding) and even at single family residences (more passive, but not completely passive), but for the moment, I will sleep better at night having not entered into the chaos of vacation rental ownership.
Update September 7, 2021: Since I originally wrote this post, I’ve looked further into Real Estate Syndications, and decided that even they are going to be a bit too much work for me. I’ve settled on investing in Vanguard’s Real Estate ETF (VNQ). Due to the tax advantages of holding VNQ in our IRAs, we have gone that route.
This is a good overview of rental properties in 2019-2024!
I’ve had many of these same thoughts in regards to rental properties.
There is certainly money to be made if you can find the right deal, but the deals I’ve looked at don’t seem to significantly outperform other asset classes such as index funds or building a small business.
Most of the successful real estate people I know took an amount of leverage I’m frankly not comfortable with. While I’m happy for them that it’s worked out Weill over the 2020-2024 time period these good times won’t last forever.
The other issues I have with rentals are:
1) you don’t have pricing power, it’s just a commodity, you basically have to rent at the going rate
2) You don’t control costs, taxes, insurance, maintenance costs, some of these things you can shop around for and cut corners, but most of these things age going to cost what they do and they tend to go up every year.
3) As you pointed out it’s not that passive. For the limited upside and increased exposure to risks it doesn’t seem worth it in this market.
This being said I’m not against rentals in the future if conditions change, I’ve rented rooms out before and would be willing to buy a good property at a good price. but today we aren’t seeing much of that, so it doesn’t justify the extra work.
Hi AR,
I came over from JL’s website and you nailed it regarding rentals. I’ve been a “successful” landlord for over twenty years and I’ve sold off most of my portfolio.
In my opinion, over the last ten years I’ve noticed an entitlement attitude that renters think they ought to live for free. This attitude coupled with the ever stringent regulations on the landlords, of course non for the tenant, has added significant risk to having rental property. And, the coup de grace was the eviction moratorium.
I still have two rentals but there days are numbered.
Again, good post and wish you all the best.
Semper FI,
Luis
Hey Luis,
Thanks for dropping by!
I have seen heard that as well from many landlords. Real estate is a great way to build “passive income” streams, but if you really want it to be truly passive and no hassle then REITs are the way to go. If you feel that you can take on the hassle and the headaches, it will be worth your while, but that is definitely not for me.
Good luck selling off the last two of your rentals!
Good choice! I also looked at a real estate deal with my friend last month. We got a broker / I got approved for a mortgage / the whole nine yards.
I was super excited and about to pull the trigger when… I find out the property will not cash flow. All that analysis and work down the drain… Back to stock investing for me.
The amount of work you have to do up front is astounding. Real estate is a great wealth building tool, but it is simply a lot of work. And for me, anything I work on, I want to enjoy and I don’t really enjoy doing home renovations, customer service, sorting through properties online or in-person etc.
Good choice as well!